Abstract. Recent research shows that a high wage-gap between managers and workers identifies better-performing firms, but the stock market does not seem to price this information. In this paper, we show that not all investors neglect pay inequality. Using a unique data set on German firms' employee compensation, we find that the mispricing of the wage gap is driven by limits to arbitrage. Specifically, some investors seem to bid up low-wage-gap stocks for non-monetary reasons, thus exhibiting a preference for low pay-inequality. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital.
Coauthors. Ingolf Dittmann (U Rotterdam, Tinbergen Institute) and Yuhao Zhu (U Rotterdam).
Manuscript. You can download the paper here.
Working paper series. European Corporate Governance Institute – Finance Working Paper No. 727/2021.
Presentations. The Workshop on Corporate Governance and Investment at Oslo Metropolitan University, Global Finance Conference, the IFABS Asia Ningbo China Conference, the IFABS Corporate Finance Conference at the University of Oxford, the Finance Forum at Universitat Pompeu Fabra in Barcelona, the Behavioral Finance Working Group Conference at Queen Mary University of London, the Israel Behavioral Finance Conference at Tel Aviv University, and the Erasmus Finance brown bag.
Publication. Journal of Corporate Finance, Volume 78, February 2023, 102322, DOI: https://doi.org/10.1016/j.jcorpfin.2022.102322.